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Tag: trade liberalization

The European politicians love to talk about the “huge” benefits of membership in the European Union. It is certainly true that the “single” market between the EU member states has brought tangible benefits, but those have been declining in importance as technological change made access to services and capital cheaper and easier, and trade liberalization progressed world-wide. Moreover, as the Brussels-based EU bureaucracy expanded, economic liberalization gave way to regulation that helped to strangle European growth (see the graph below). Consider the latest absurdity to emerge from Brussels—a poultry regulation, which aimed to increase the comfort of the egg-laying chickens, but resulted in a drastic cut in egg production and a 100% increase in the price of eggs.

The EU bureaucracy may not appreciate the problem of unintended consequences, but ordinary Europeans are beginning to realize that the EU no longer is what it used to be—a byword for prosperity and stability. In the Czech Republic, for example, a record number of citizens do not trust the EU (63 percent) and the EU Parliament (70 percent). If the EU elite persist in killing jobs and growth, it may bring about the ultimate unintended consequence—the break up of the EU.

The letter contains much about the benefits of the program, with little mention of its costs to taxpayers and even less concern shown for the innocent consumers whose pockets have been picked for decades to maintain the jobs lost when trade is allowed to flow more freely. That’s pretty standard fare for protectionists, who rely on the hidden and dispersed nature of the costs to get support for their policies. What’s new about this situation is the ratchet effect – the base TAA program is still in place, so what they are asking for is a renewal of part of the stimulus as a pre-condition for supporting trade liberalization. Note that the stimulus changes included a removal of the requirement that job losses be linked to a trade agreement (a feature, not a bug of the program, according to the Senators).

Wait, did I say a renewal of TAA-plus would be a pre-condition for supporting trade agreements? Not necessarily. Note this telling paragraph of the letter:

While we the undersigned may have differing views on elements of the trade agenda - with some of us looking forward to supporting the pending trade agreements with South Korea, Colombia, and Panama, and others skeptical of the impact of the agreements -we are unified in our belief that the first order of business, before we should consider any FTA, is securing a long-term TAA extension. [emphasis added]

As I’ve said repeatedly, I understand (even if I don’t support) the political calculation that TAA is necessary – and worth it– if it secures votes for trade liberalization. But reading between the lines, some of the letter signers have no intention voting for the trade agreements, even if the mega-TAA is approved. What we have here is a reversal of the grand bargain on trade liberalization, that gave extra welfare to workers who lost their job because of freer trade in exchange for support for trade agreements that lowered trade barriers. That ‘grand bargain’ has been tenuous for years now, of course – witness the complete lack of movement on the trade agreements even after the 2009 enhancement of TAA, at least until recent months. But now, rather than using TAA to buy votes for trade liberalization, the administration and their allies appear to using pretty-much-assured votes for trade liberalization to buy TAA. As a Wall Street Journal editorial said on Friday, it’s extortion.

I have a new paper out today on the Generalized System of Preferences, the program by which the U.S. government allows certain imports from most developing countries to enter the U.S. market duty-free. The program has benefits: some producers in some poor countries are able to sell more than they otherwise would in the U.S. market, and U.S. consumers benefit to the tune of hundreds of millions of dollars a year because of the tariff exemptions.

But the GSP still represents managed trade, and poorly managed at that. The program is designed so certain goods in which poorer countries tend to have a comparative advantage – textiles, for example – are excluded from the program, mainly because of the influence of the U.S. textile lobby. There are limits on how much of a particular product a beneficiary country can export duty-free, which means that truly efficient and competitve exporters are shut out. The very existence of the program has proved a stumbling block to (superior, if not first-best) multilateral trade liberalization, because GSP beneficiary countries don’t want reductions in general tariffs to erode their preferential access.

With the GSP expiring at the end of the year (more here on possible vehicles for its passage [$]), it is a good time for Congress to consider radically changing this program. The best way to secure an open, prosperous world economy is to allow trade to flow freely across borders. If that is a bridge too far for politicians, they should at least consider some of the other reforms I suggest to make the GSP more open to more products, and to reduce the interference these programs impose on voluntary, peaceful exchange. Opening the U.S. market on a permanent and non-discriminatory basis should be the ultimate goal.

This has not been a good week for the national Democratic Party. Along with losing the Massachusetts Senate seat, the party took another step toward making hostility to trade liberalization a plank of party orthodoxy.

As my Cato colleague Sallie James flagged earlier today, the Democratic Congressional Campaign Committee issued a press release yesterday criticizing a Republican candidate in upstate New York for contributing to the Cato Institute. And, of course, everyone knows that Cato is “a right wing extremist group that has long been a vocal advocate for extremist, unfair trade policies that would allow companies to ship American jobs overseas.”

Among our sins, in the eyes of the DCCC, is that Cato research has supported tariff-reducing trade agreements, such as the North American Free Trade Agreement (NAFTA). Our work has also advocated unilateral trade liberalization—getting rid of self-damaging U.S. trade barriers regardless of what other countries do—which violates the conventional Washington wisdom that we can’t lower our own barriers without demanding “reciprocity” and “a level playing field” from other nations

There is nothing extreme about our work on trade. It fits comfortably within mainstream economics expounded not only by Adam Smith and Milton Freidman but by such liberals as Paul Samuelson and Larry Summers.

In fact, for decades, the Democratic Party embraced lower barriers to trade:

In the 1930s and ’40s, President Franklin Roosevelt and his Nobel-Peace-Prize-winning Secretary of State Cordell Hull lead the United States away from the disastrous protectionism of President Hoover and a Republican Congress.

Democratic Presidents Kennedy, Johnson, and Carter all supported successful agreements in the General Agreement on Tariffs and Trade to reduce trade barriers at home and abroad.

Bill Clinton, the only Democrat to be re-elected president since FDR, persuaded a Democratic Congress to enact NAFTA in 1993 and the Uruguay Round Agreements Act in 1994, which created the World Trade Organization. Clinton also championed permanent normal trade relations with China in 2000, which ushered that nation into the WTO.

In the previous Congress, scores of House Democrats co-sponsored “The Affordable Footwear Act,” which would have unilaterally lowered tariffs on imported shoes popular with low-income Americans. Liberal Democrat Earl Blumenauer of Oregon visited the Cato Institute in July 2008 to speak in favor of the bill. (Will he be the next target of a DCCC press release for cavorting with “extremists”?) In the current Congress, a similar bill in the Senate is currently co-sponsored by such prominent Democrats as Dick Durban (Ill.), Chuck Schumer (N.Y.), and Mary Landrieu (La.).

During a speaking trip to China three years ago, the young tour guide in Beijing kept referring to “the liberation.” I soon realized that she meant the October Revolution of 1949, in which Mao Tse Tung and the communists seized power and began their rule 60 years ago today.

Far from liberating China, the reign of Mao represents one of the worst tyrannies in the history of mankind. Opposition parties, free speech and freedom of religion were quickly eliminated. The Great Leap Forward of 1958-61 forced the collectivization of agriculture, resulting in a famine that killed tens of millions. The Cultural Revolution of 1966-76, while not as deadly, unleashed chaos that crippled the economy and scarred a generation. As Gordon Chang writes in a Wall Street Journal op-ed this morning, the celebration by the Chinese people will be understandably muted.

China’s real liberation began not 60 years ago, but 30 years ago, with the reforms of Deng Xiaoping. While China remains an oppressive, one-party state politically, its economy has taken a true great leap forward in the past three decades because of market reforms in agriculture, industry, and trade. China’s liberation has far to go, but the Chinese people today are much more free of government interference in their personal, daily lives than they were in the time of Mao.

When I point to China’s economic progress as an example of what trade liberalization can deliver, my debate opponents will sometimes counter that China is a communist country. But China’s dramatic growth has not occurred because of its residual communism. For 30 years now, its government has been in the process of abandoning the communist economic policies of Mao and his fellow “liberators,” much to the benefit of the Chinese people and the world.

The answer is quite simple: we believe the president understands the importance of both trade and U.S. trade leadership to the broader objectives of economic growth and good will among nations. Since he is inevitably going to alienate some of the constituencies who helped get him elected by embracing trade openness, he could be forgiven for his perceived apostasy if he can articulate his rationale convincingly.

The most comprehensive and convincing articulation would begin with the moral case for free trade: that every American has the right to transact with whomever he chooses, regardless of the nationality or location of the other party. Voluntary exchange between consenting parties is inherently fair, while government coercion in that process on behalf of some citizens at the expense of others is inherently unfair, inefficient, and subversive of the rule of law. We are not holding our breath that this president will make this principled case for free trade. But his articulation of other pro-trade arguments, after so many years of hyperbole, myth-making and fear-mongering from his colleagues on Capitol Hill, could go a long way toward correcting and reversing Americans’ artificially-induced aversion to trade.

Why are we so sure that President Obama is going to embrace trade openness? Well, we’re not so sure, but it’s more than a hunch. Here are two broad reasons:

First, like all presidents in the modern era, Obama takes a national perspective on economic matters, and not a local or regional perspective, as most members of Congress do. Unlike a candidate or a member of the opposition party in Congress who is free to criticize the incumbent administration’s policy errors without having to seriously consider the pros and cons of the alternatives, the president has to concern himself with the consequences of policy changes. It’s potentially his mess to clean up. As a senator and presidential candidate, Obama promised to aggressively pursue remedies to China’s alleged currency manipulation. As president, Obama declined to act accordingly when given the explicit opportunity, knowing that provocation in that regard would inject more uncertainty into financial markets and could spark retaliation. A protectionist measure that briefly benefits producers in Illinois (which is why a Senator Obama might support it) could have consequences that penalize an array of interests across the country (which is why a President Obama might oppose it).

Second, President Obama—like all Democratic and Republican presidents in the post-WWII era—sees trade policy as a tool of foreign policy. And from his early trips abroad, Obama has learned that to many countries around the world, U.S. trade policy is the most consequential aspect of U.S. foreign policy. So a president who appears determined to repair the damage caused by eight years of unilateralist foreign policy can only embrace trade openness.

In our paper, Scott and I present several other reasons why we are “audaciously hopeful” that the president will help restore the pro-trade consensus. But some nascent support for our audacity can be found in the following examples:

1. President Obama spoke out against the protectionist Buy American provisions in the original “stimulus” package, and Congress subsequently removed its most egregiously protectionist aspects.

2. The president has encouraged Congress to resolve the Mexican trucking ban and bring the United States into compliance with its NAFTA commitments.

3. The Obama Treasury declined to label China a currency manipulator in its first semi-annual report on the topic

4. The president informed Mexican president Calderon last week that he did not think NAFTA would need to be reopened—contrary to his campaign rhetoric.

5. The president said as much to Canadian PM Stephen Harper back in February.

6. There are increasing signs of interest and promise from the White House and Congress that the long-frozen bilateral trade agreements with Colombia, Panama, and South Korea could start moving soon.

The pro-trade environment is not certain, and it could be fleeting, but there’s a case to be made that it’s not as dire as some predicted it would be. If the president intends to facilitate a liberal trade agenda, he should start laying the groundwork with strong pro-trade arguments now.